Global stock markets rose sharply last week on optimism over the resolution to the European debt crisis. All major markets posted gains and the US Nasdaq topped the charts, gaining 7.6%. The Nasdaq, which has gained 10.5% month-to-date, is the best performing bourse. The rally on trouble-hit Europe and the US has not only boosted the confidence of investors but also allayed fears about risky assets.
The fact that US markets escaped the bear zone and rose considerably from there was the first sign of improvement. However, since US markets are still in a short-term consolidation zone and are now placed at the threshold of the consolidation zone, this week is going to be very important.
If S&P 500 closes above 1,230 points this week, supported by good volumes, it will be a confirmation of positive trend on US bourses and a good news for markets the world over. What is technically supporting the positive trend in S&P and Dow is the down trend in US volatility index VIX, which now seems to be heading for a sharp fall.
From an Indian perspective, the consolidation phase, which I have been talking about in my last few columns, is close to the upper threshold. As I mentioned in my last column, the Nifty has a very strong resistance at 5,167, which will be like a trend decider. Interestingly, all these parameters are coinciding with the global trend and, thus, technically the chances of the continuation of the rally on Indian and global bourses are now high.
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But, fundamentally, not much has changed in India. Growth concerns and high rates of inflation persist, suggesting the biggest fear of Indian markets—tightening of monetary policy by the Reserve Bank of India (RBI)—could continue, and there could be more pain left in the economy than earlier thought. But amid the fundamental gloom, technical indicators are showing good strength after a long time, which to me is good news for Indian markets. This analysis means good gains with a rally of 4-7% on the Indian bourses.
I do not see runaway rallies on the Indian bourses, or for that matter, in the rest of the world, at this point of time as optimism over euro zone is riding on high cost—and sooner than later, this will also get factored into asset class. Another important factor is the dollar index, which is showing signs of weakness once again. The dollar index touched a high of 79.838 on 4 October but fell to a low of 76.508 on Friday. Technically the index has support at around 75.96. If it goes, it would mean a further fall in the dollar index; but on the other hand it would also boost commodity prices, adding to inflationary concerns.
Nymex crude gained 4.6% last week, while Brent crude gained 8.3%. Other commodities that rose sharply on Friday and for the week include copper, natural gas, US sugar and palladium. Interestingly, the spurt in commodity prices was at least double the fall in the dollar index, which suggests strong sentiments in commodities. This could be the trouble spot for the Indian bourses as the rupee has not responded to the fall in dollar index. If the rupee remains weak in coming days, it will become a cause of concern.
This week, equities are likely to start on a positive note on positive corporate earnings and positive outcome of the G-20 meet in France, in which leaders from the top 20 economically strong countries pressed Europe to act boldly within eight days to resolve the euro zone’s sovereign debt crisis.
On the Indian economic platter, there is not much to offer, though there would be concerns ahead of RBI’s next policy review meeting on 25 October, which may see some profit taking towards the end of the week. Prominent economic indicators this week include industrial production and capacity utilization on Monday; producer and consumer inflation on Tuesday and Wednesday, respectively; and weekly jobless claims on Thursday in the US. In China, the quarterly gross domestic product and industrial output will be released on 18 October. These events will be watched closely for cues on world’s two top economies.
Technically, as I mentioned earlier, the Nifty on its way up faces the first resistance at 5,167, which is like a trend decider. If this resistance is broken with good volumes, this could lead to further gains. The next resistance will come at 5,230, which is likely to be a moderate resistance. However, the next resistance, at 5,332, is going to be equally important as unless the Nifty closes above this, the next leg of the rally will not begin. Though I expect some consolidation around this level, which also includes mild profit selling, I think the bullish undertone will remain. A confirmatory close above this level will mean the next leg of the rally, which will have its first resistance at 5,432 points.
On its way down, the first support is likely at 5,040, and a fall below this will be bearish in the immediate term, which would open a further downward gap. The Nifty is likely to see strong support at 4,967 points.
Among individual stocks, ICICI Bank Ltd, Shipping Corp. of India Ltd and Hindustan Zinc Ltd look good on the charts. ICICI Bank, at its last close of Rs 890.40, has a target of Rs 907, and a stop-loss of Rs 868; Shipping Corp., at its last close of Rs 71.85, has a target of Rs 75, and a stop-loss of Rs 68, while Hindustan Zinc, at its last close of Rs 120.50, has a target of Rs 125, and a stop-loss of Rs 115. From my last week’s recommendations all three stocks—LIC Housing Finance Ltd, Hindalco Industries Ltd and ABG Shipyard Ltd—overshot their targets by a wide margin.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at firstname.lastname@example.org